Old National Bancorp (ONB) 2007 Q1 法說會逐字稿

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  • Operator

  • Welcome to the Old National Bancorp first-quarter 2007 earnings conference call. This call is being recorded and has been made accessible to the public in accordance with the SEC's Regulation FD. The call along with the corresponding presentation slides will be archived for 12 months on the shareholder regulations page at www.OldNational.com. A replay of the call will also be available beginning at 1 PM Central today through May 14. To access the replay, dial 1-800-642-1687, conference ID code 5511786.

  • Those participating today will be analysts and members of the financial community. At this time, all participants are in a listen-only mode. Then we will hold a question-and-answer session and instructions will follow at that time. At this time, the call will be turned over to Lynell Walton, Vice President of Investor relations for opening remarks. Ms. Walton?

  • Lynell Walton - IR

  • Thank you, Megan, and again and welcome to Old National Bancorp's first quarter 2007 earnings conference call. With me today are Old National Bancorp's President and Chief Executive Officer, Bob Jones; our Chief Financial Officer, Chris Wolking; and our Chief Credit Officer Daryl Moore.

  • Before we begin, I would like to refer you to slide three and point out that the presentation today does contain forward-looking statements that are subject to certain risks and uncertainties that could cause the Company's actual future results to materially differ from those discussed. These risks and uncertainties include but not limited to those which are contained in this slide and in the Company's filings with the SEC.

  • Slide four is our agenda for the call. First, Bob Jones will provide an overview of our first-quarter earnings results, including the various initiatives undertaken to further enhance the performance of the Company as well as the commercial loan and core deposit growth within our banking regions and the deposit generating performance of our newer financial centers. Bob will also discuss our outlook for key drivers of financial performance as well as give an update on the completed St. Joseph acquisition. Daryl Moore will then lead the analysis of our continued improvement in the overall quality of our loan portfolio. The call will then be turned over to Chris Wolking, who will detail the items impacting our net interest margin for the first quarter as well as the initiatives aimed at improving the future performance of our margins. And also, he will discuss our prudent expense management during this difficult operating environment.

  • With that, I will turn our call over to our President and CEO, Bob Jones.

  • Bob Jones - CEO, President

  • Thank you, Lynell, and thanks to everyone that's joining us on the phone. Our goal on this call as it is with every call we do with you is to be as transparent and open with you as possible. That's even more critical as we discuss our first quarter results for Old National is there were a number of actions that we took during the quarter that were taken with the intent of improving both our short-term as well as our long-term performance. These were the actions that we discussed with you on our fourth quarter call and our intent then was to give you more detail today.

  • These actions were focused on two very important areas. First was reducing our expense base with the acknowledgement that the headwinds we face in today's [rate and] economic environment necessitate looking at all options to provide shareholder return.

  • These actions will reduce our headcount, our FTE, by 122, which when coupled with 23 reductions we took at St. Joseph's reduce our total FTE by 145. We also took a hard look at a number of other operating expenses and later on in the call Chris will add the appropriate color to enable you to build your models. We also took very specific actions to improve our margin for the balance of the year. Chris will again discuss with you these actions and the benefits they should have on our margin for the full year. During the call, we will also update you on our continued good progress improving our credit quality.

  • Turning to slide six, this morning we reported earnings of $0.16 per share which is in line with the guidance that we gave you on our fourth quarter call. Included in this number was approximately $0.075 of special charges that we took during the call for the actions that I spoke about earlier and that Chris will give you some greater detail later on in the call. Given those actions when coupled with what we see happening in our markets does allow us to confirm our full-year guidance for the year at $1.11 to $1.17, which is exactly what we said in the fourth quarter. This guidance is reflective of what is a very difficult operating environment for mid-cap banks in the Midwest.

  • Turning to slide 7, the overarching theme for this quarter is our continued recognition of a difficult operating environment which when coupled with our continued turnaround requires us to be very proactive in 2007 which means controlling our cost, ensuring we get the proper return on our loans and pricing appropriately on our deposits. What it does not mean is a wholesale change in our overall strategy. We will still be driven by our three strategic imperatives and we will still maintain a very conservative stance towards both structure and pricing of our loans. We believe these are times when focus needs to be on operating fundamentals and improving our basics, not on reactionary strategic changes. Given that preamble, let me highlight what I think were the strengths and challenges of our first quarter.

  • Clearly the first quarter, and I would surmise for the full year, our ability to control expenses is extremely critical to our achieving our performance targets. As Chris will show you later on, we were very (inaudible) with our efforts on his front and believe that those efforts along with the actions that we took during the quarter should reflect positively for the balance of the year.

  • We continue to be very pleased with our improving credit quality as Daryl will point out later. We feel that the leading indicators do reflect this improved quality of our portfolio. We do believe that the conservative approach we've taken over the last few years should reflect positively on a go-forward basis for Old National. Our integration for St. Joe was very successful from both a systems and a cultural basis. We are very pleased with the fact that we've retained all of our key people and that client impact has been minimal. We have other challenges. The current economic and interest rate headwinds, when coupled with our own conservative credit culture, has caused our asset growth to be challenging. I will review this by market in greater detail on the next slide and give you a perspective on the balance of the year. We also saw continued pressure on our margin for the first quarter. While we are pleased that our proactive actions during the quarter will remedy some of his pressure, pricing competition along with slower loan growth did put continued pressure on the margin. Chris will review with you how we will improve this and what it will mean for us for the balance of the year.

  • Slide 8 is a recap of our individual markets relative to commercial loan growth. As you can see, it's evident that no market had robust growth and in fact a few had meaningful declines in performance. There really were a combination of factors that contributed to this slowdown. Clearly as I have said before, the economy is slowing and we have seen demand fade. We have also seen people paying down their lines with excess cash. In addition, we did experience some unanticipated paydowns, large paydowns, in a few of our markets, Louisville and Evansville in particular. These were large paydowns are the result of businesses either being sold or in one case an estate being settled. But in all cases, we did retain the relationship and maintain relationships on all of our other products. In Indianapolis, we were affected by a small loan sale as we continued to focus on improving credit quality as well as the planned exit of some lower-quality credits in the market.

  • This reduction in lower grade credits is also reflective in all our markets and it does diminish our growth prospects. But all is not about external factors. We do have internal factors we need to continue to work on as we focus on our turnaround. Barbara Murphy has done a very good job in getting our commercial teams more focused on the sales process and proactively doing prospecting. But we're clearly not at the level she expects and will continue to work on these very important skills.

  • Slide 9 we highlight the DDA performance for the quarter. Just a couple of comments here. We do see the benefit of our new locations in Indianapolis and Lafayette. Just so you know, Lafayette is included in the Northwest region. I might mention that while Louisville's numbers show a decline, it is all related to one large client who had a substantial deposit at year-end and then transferred it out at the beginning of the first quarter into other areas within the bank. Our DDA balances are also reflective of the sales activity of the fourth quarter. As we mentioned on the call, fourth quarter sales activity actually resulted in a negative 645 net new accounts being opened, while during the first quarter we saw positive 1127 account openings. This positive number continues to grow to 3535 when you include St. Joe.

  • Slide 10 further highlights the performance of our new branches. We continue to be pleased with our investments in these key markets, these three key markets, but also remind you that we have no plans -- we have plans to open only one more branch this year, that being in Lafayette. The only exception to that might be any further expansion in northern Indiana. John Rosenthal and his team is currently finalizing a plan which we will review later this quarter as to our allocation of capital.

  • Slide 11 -- let me just give you an outlook for us for the balance of the year. We do believe that credit quality should continue to improve for the balance of the year. This outlook is based on the leading indicators that Daryl will discuss with you. It is also a reflection of the enhanced credit culture that we have established at Old National. As Chris will discuss, Old National's margins should expand through the balance of this year and our expenses should be well-controlled. We do see a quarterly run rate in the range of $67.5 million to $68.5 million for the balance of the year on a quarterly basis. But from a balance sheet perspective, we do expect that the balance of the year will be on of slow to moderate growth.

  • Finally, for me, let me turn to slide 12 as we show the highlights of our St. Joseph acquisition. If I could sum it up in one word, it would be great. We are very pleased at the way the deal has come together. As I said earlier, we have hit every benchmark as it pertains to systems, and probably more importantly, cultural integration. We have retained all of our key players who in turn have worked very hard to retain our key clients. Daryl will discuss our conservative approach we did take towards integrating our loan portfolio which we do believe is the prudent way to handle it for shareholder value.

  • With that, let me turn the microphone over to Daryl.

  • Daryl Moore - Chief Credit Officer

  • Great, thank you Bob. Good morning. My first two slides this quarter are slides that show trends in what we believe are good early indicators of credit risk in our portfolio. Slide 14 shows our credit size loan trends over the last 13 quarters. As we have discussed from prior calls, our trend line showed good progress resulting from our efforts to reduce [criticized] loans up until the third and fourth quarters of 2006 where we posted elevated levels. We're pleased to be able to report to you that we have made good strides in the first quarter of 2007 in bringing the levels of criticized loans down. For the quarter, we reduce criticized loans by roughly $22 million, resulting in an 18% decline in those categorized loans during the period. We believe that the results in the quarter reaffirm that we have systems in place to address increasing risk early on in the cycle, giving us the ability to address that increasing risk in its early stages before it can manifest itself into a more severe problem.

  • The next slide shows 90-plus delinquencies in our portfolio, which we also think is an important forward-looking indicator of [future] portfolio risk and loss trends. As you can see, we have historically managed our 90-plus delinquencies well but posted very good results at this quarter's end with the 90-plus delinquencies staying at 1 basis point of our total loan portfolio at quarter's end. As you can see, this compares very well to the peer group against which we measure our performance.

  • As slide 16 shows, classified loans rose during the quarter showing an increase of slightly more than $13 million in the period. It now stands at $166.4 million. I think it's very important to note that classified loans associated with the acquisition of St. Joe Capital Bank at the end of the quarter totaled $18.5 million. Obviously without the increase associated with the St. Joe acquisition, we would have posted a decrease of roughly $5 million in this category in the quarter.

  • As you can see on slide 17, non-accrual loans rose to $60.5 million at quarter's end. Increasing non-accruals during quarter came from two sources. The first was a downgrade into the non-accrual category of our previously classified loan with exposure of $9.3 million. This loan had been in our classified category for some time, but in the quarter tripped our non-accrual triggers and was appropriately downgraded. The second source of increase in this category was the addition of $12.3 million in non-accrual loans associated with the acquisition of St. Joe Capital Bank. While these two sources accounted for $21.6 million in additional non-accrual balances, reductions in all other non-accrual loans during the quarter resulted in the net $18.9 million increase for the period.

  • With respect to our largest non-accruals, with the addition of the new $9.3 million loan into the non-accrual category, we now have three loans in the non-accrual status of $5 million or greater.

  • As a final note on non-accruals, at March 31, slightly more than one-half of all loans in non-accrual status were the either contractually current or less than 30 days delinquent on their payments.

  • Turning to slide 18, net charge-offs for the quarter were $4.6 million, or 38 basis points on an annualized basis. Within that total was a $1.1 million write-down on the commercial loan in the Indianapolis portfolio. This 38 basis points is slightly outside our targeted range for the year of 25 to 35 basis points. With respect to our allowance for loan losses, we did book a provision for loan losses of roughly $2.4 million in the quarter and our allowance to total loan ratio now stands at 1.46%, up slightly from last quarter's levels. We continue to work hard to get our more marginal credit stabilized and upgraded where we can. If we're unable to accomplish those upgrades over a reasonable time frame, we will continue to work to move these types of credits out of our bank through a variety of methods, including refinancing by the borrower or sale by the bank. If the positive trends we experienced this quarter in criticized and classified loans continue, we could see the benefits in the provision expense area over the balance of the year.

  • Before I conclude my remarks, I'd like to comment on two topics that are not the subject of slides.

  • My first comment relates to the issue of sub-prime lending. There obviously has been a fair degree of discussion in the markets in recent weeks about sub-prime lending. I wanted to communicate to the group that Old National does not have a sub-prime lending division, nor do we actively seek these types of loans. We, as with all banks, will put loans on our books that may have one or more of the traditional characteristics of the sub-prime loan, such as a lower credit score, but in these instances these loans have come to us through our normal prime lending channels and are unwritten in a manner that attempts to mitigate the risk in the individual transaction.

  • My second comment relates to the St. Joe Capital Bank acquisition. We have as I have pointed out seen increases in our classified non-accrual loans in the quarter associated with the St. Joe Capital Bank acquisition. While we're confident that the lending culture at St. Joe will be assimilated into Old National culture nicely, it became apparent during our in-depth review of the portfolio prior to closing that the manner in which St. Joe Capital with state regulatory oversight classified credit risk was not consistent with the manner in which Old National as an OCC-regulated bank classifies credit risk. Our associates in Mishawaka and Elkhart are working very hard to bring down their classified non-accrual totals through both working with the clients to obtain additional financial information to more fully understand the risk the borrower presents to the bank as well as looking at ways to restructure or move risk out of the bank. These efforts when paired with the experience of our special assets area should allow us to reduce the outstandings in these categories over the near to intermediate term. And some confirmation of this belief, non-accrual loans in the former St. Joe Capital portfolio were reduced by $1.2 million in the month of March alone.

  • With that, I'll turn the call over to Chris Wolking.

  • Chris Wolking - SVP, CFO

  • Thank you, Daryl. I will finish the call today by providing you information on our net interest margin for the first quarter as well as key points around our margin and operating expense expectations for the remainder of the year.

  • Our margin for the first quarter was 3%, down 9 basis points from fourth quarter 2006. Slide 20 is our familiar margin decomposition slide. Higher asset yields contributed to an increase in the margin of 2 basis points during the quarter. Most of this lift was due to our decision to sell low-yielding federal agency securities in February. Moving down the chart, significantly higher liability costs during the quarter contributed to a decrease in the margin of 19 basis points. Expensive core deposits acquired in the St. Joseph Capital transaction increased costs at our trust preferred securities due to our decision to terminate an interest rate swap designated as a hedge and the impact of a successful savings account campaign caused the majority of the increase in the cost of liabilities.

  • Finally, improved asset mix and higher loan volume lifted margin 10 basis points during the quarter. Loans acquired in the acquisition and our ability to reduce wholesale funding with the cash generated from our fourth quarter sale leaseback contributed to the positive impact from mix. Offsetting this benefit somewhat was the impact of the St. Joseph Capital acquisition, which is also reflected in the volume mix line item on our chart. Recall that this acquisition was an all-cash transaction and increased our leverage.

  • Slide 21, you'll see the comparison of our interest-bearing deposit to those of our peers. During the fourth quarter of 2006 we continued to track in line with our peers after many quarters of higher costs. Notwithstanding our increased liability costs for the first quarter, we believe we will continue to perform well compared to our peer banks.

  • While higher deposit cost contributed to a disappointing decline in our margin, you will note on slide 22 some positive results in our first quarter deposit efforts. We had a very good quarter, generating new checking accounts as Bob noted, adding 3535 accounts during the quarter. 2408 accounts came from the St. Joseph acquisition and 1127 came through the efforts of our associates at our existing locations. Additionally, we generated 5562 new savings accounts in a successful sales promotion during the quarter. The savings accounts contributed $105 million in new core deposit balances.

  • We believe that we have the ability to expand our margin from the first quarter's 3%. First and foremost, we are focusing on the costs of our interest-bearing deposits. We're reducing the rates on the newly acquired public sector customer accounts from St. Joseph, eliminating the remaining special index rates in our regions and reducing further our negotiable certificates of deposit funding. Additionally, as we have done over the past several quarters, we will continue to reduce our wholesale funding. You'll note that wholesale funding declined $100.7 million at March 31 from December 31, 2006.

  • Continuing to improve our asset mix is also important to our ability to expand our margin for the remainder of the year. As Bob noted in his presentation, loans increased in total during the quarter due to our acquisition of St. Joseph. Total loans increased $181.2 million from December 31, to March 31, with St. Joseph contributing $342.9 million in new loans. Most of our regions experienced a decline in loans during the quarter. While increasing loan portfolio is key to an improved asset mix and should lead to a more significant expansion of our net interest margin, we believe that maintaining our current asset quality is critical. Until we have the opportunity to increase our loan outstandings, we anticipate continuing to use our liquidity to reduce expensive funding.

  • The investment portfolio, including federal funds sold, declined to 27.6% of total assets from 31.7% of total assets at December 31. Federal funds sold increased to 4% of total assets at March 31 from 1% of total assets at December 31.

  • As you likely noted on our financial trends released today with our earnings press release, we had a $68.8 million decrease in premises and equipment from December 31, 2006 and a $76.4 million increase in other assets. We are currently in negotiations to sell and lease back most of our branch locations. Slide 23 goes into further detail on the sale leaseback transaction.

  • The transaction is anticipated to close in the third quarter and should contribute to $0.02 to $0.025 in 2007 and $0.03 to $0.035 per share in 2008. While we have not yet finalized the transaction, we anticipate the sale leaseback to increase our occupancy expense by approximately $1,100,000 per quarter when we subtract the income from the gain on the sale from the additional lease expense. The should be more than offset by the benefit of the net interest income generated from the sale proceeds.

  • Our work during the fourth quarter of 2006 and the first quarter to improve productivity at the Company resulted in 107 personnel reductions in select areas. The total is 122 with 15 additional reductions anticipated, as Bob noted. This reduction more than offset the addition of St. Joseph's work force. We expect some additional reductions throughout the year for productivity improvement projects still underway.

  • Additionally, in early April after the conversion of St. Joseph Capital to the ONB operating platform, we completed most of the anticipated reductions in the St. Joseph workforce, now known as our northern region. We anticipate total reductions of 23 positions in the northern region, 21 of which had occurred by early April. While it is always difficult to eliminate positions, we feel it is of critical importance as we continue to work to reach our efficiency goals.

  • Thank you for joining us this morning, that concludes our presentation and we will now be happy to take your questions.

  • Bob Jones - CEO, President

  • Operator, if you could open line for questions, that would be great.

  • Operator

  • (OPERATOR INSTRUCTIONS). Troy Ward, AG Edwards.

  • Troy Ward - Analyst

  • A couple of quick questions. Can we walk through real quickly the onetime items? I have got two -- on the front of the press release, it says $3.7 million, or $0.04 per share related to the balance sheet restructuring. I saw of course the 2.7 in kind of gain -- the securities line. Where is the other $1 million?

  • Chris Wolking - SVP, CFO

  • Troy, this is Chris. A good percentage of those costs were associated with terminating wholesale funding which would have obviously shown up differently in the income statement. Through the margin contribution, I would guess. I'm looking at [Joan] -- or other expenses, pardon me -- and these would have been home loan advances, some structure repo on the books. I think that was primarily it. But clearly on the liability side of the balance sheet too.

  • Troy Ward - Analyst

  • Okay so when we are thinking about run rate for the other expense line, it's probably in there, that extra 1.0?

  • Chris Wolking - SVP, CFO

  • Yes.

  • Troy Ward - Analyst

  • Okay, good, that's where I have taken it out of. And then just on kind of a broader look at the quarter, if I start to back out some of these numbers, the 2.7 and the 1.4, the salary and benefit, and then you know you had a 700,000 reversal of an accrual. Just kind of pulling all those things out, I get closer to like a $0.23 core number. Is that about where you think it should be?

  • Bob Jones - CEO, President

  • $0.23 to $0.24, Troy. We also had a full accrual for incentives in the quarter as well. But, yes, you're in that $0.23 to $0.24 on a non-GAAP basis.

  • Troy Ward - Analyst

  • The way I see it, you had about $0.01. Now, it's still good income, of course I'm not trying to back it out, but you had $0.01 -- $1.2 million in seasonal fee revenue, is that correct?

  • Bob Jones - CEO, President

  • Not really. We didn't get the large increase in contingency revenue from the insurance this quarter we normally get. So I would tell you, your non-interest income is probably right about where it would be.

  • Troy Ward - Analyst

  • Chris, can we walk through kind of the thought process on the balance sheet restructuring, kind of the breakeven scenario? Obviously, it was approximately a $0.04 loss or charge in the quarter. How much pickup are you going to get going forward, and when will that restructuring actually pay off?

  • Chris Wolking - SVP, CFO

  • Well, those transactions occurred in February, so we clearly would anticipate that the impact there, full impact, shows up in the second quarter, Troy. I think we've benefited somewhat from the movement in rates and we didn't spend as much on those as we anticipated. I generally am much more interested in using those kinds of expenses to reduce wholesale funding, particularly in our case on our balance sheet, rather than taking losses in the portfolio. So we clearly focused there. I think that we'll wait and see what that impact is in the second quarter, but we feel it was pretty good transactions, and again, is kind of further aligned with our objective to reduce our wholesale funding.

  • Troy Ward - Analyst

  • And then, the comment on the margin where you're hopeful of modest margin expansion in '07, is that coming off of this 300 level, is where you're expecting a little bit of expansion from?

  • Chris Wolking - SVP, CFO

  • Yes, I think, Troy, when you look at the 3 that we had in the first quarter, you couple the actions that we took on the balance sheet, plus the improved pricing, plus the sale leaseback, we believe the margin should expand on a go forward basis.

  • Bob Jones - CEO, President

  • I think, Troy, as you saw just from the first quarter, the most significant impact was liability cost, deposit cost, and that is something we feel we clearly have control over.

  • Chris Wolking - SVP, CFO

  • The other side of it is, we have only had one real month to integrate St. Joe and we'll have a full ability to get St. Joe integrated in the second quarter as well. And clearly as we said right along there, their margin was very compressed and there were heavy prices on the public funds side.

  • Troy Ward - Analyst

  • Chris, a couple of more quick ones. First of all, did you explore the early adoption of FAS 159 in the quarter? And if so, can you comment on that?

  • Chris Wolking - SVP, CFO

  • Bob can answer that. We just didn't think it was prudent. There's so much noise, it's not consistent with our third strategic impairment, which is really consistency and quality. I was very nervous about the SEC and, you know I don't think we are at a stage where we should be early adopting anything until we get our run rates to a point where we're consistent.

  • Troy Ward - Analyst

  • I think probably a wise decision. Chris, can you go back --

  • Chris Wolking - SVP, CFO

  • Nicest thing you have ever said to me, Troy.

  • Bob Jones - CEO, President

  • I would add, it was an extraordinarily important exercise for us and I believe we're in good shape to understand the impact of that on our balance sheet and our income statement in 2008.

  • Troy Ward - Analyst

  • Chris, can you go back and I guess maybe even reiterate the comments to do with the branch sale and leaseback, the impact of that?

  • Chris Wolking - SVP, CFO

  • Clearly, let me point out the transaction is not finalized yet. We have got a lot of work to do, but the 2007 lift comes both from the new cash injected in the balance sheet. Plus, with our ability to move assets to held-for-sale, we get some depreciation expense benefits there. So, I think the $0.02 to $0.025 there for the 2007 is a good number, even given that transaction has actually closed relatively late in the year.

  • Troy Ward - Analyst

  • I guess the comment about the additional NII, the net interest income related to that -- what is your assumption there; that you're just adding more securities? I mean, because clearly, your securities portfolio I would've guessed was already a bit higher than you wanted it at 31.5% or whatever of earning assets.

  • Chris Wolking - SVP, CFO

  • Clearly, it's a good question, very good question, Troy. For modeling purposes, we used a very conservative fed funds sold, incremental fed funds sold number to evaluate the impact. It would clearly be our intent and we would anticipate using that cash to continue to reduce wholesale funding or even better yet, to make (inaudible).

  • Troy Ward - Analyst

  • (MULTIPLE SPEAKERS) Right, but clearly, it looks like you had plenty of liquidity on the balance sheet already to -- for your anticipated loan anticipated loan growth; is that correct?

  • Chris Wolking - SVP, CFO

  • Correct -- in addition to what we would expect the investment portfolio to continue to generate cash flows.

  • Troy Ward - Analyst

  • Real quickly, credit, Daryl. I guess with -- can you just walk us through I guess the credit at St. Joe? I know -- well, I guess what were the nonaccrual levels going into the transaction, and what are the today?

  • Daryl Moore - Chief Credit Officer

  • Well, the nonaccrual levels, if you look at St. Joe, what they reported on their financials at the end December -- they had no nonaccruals. And at the end of March after we had integrated them into Old National, they were at $12.3 million.

  • Troy Ward - Analyst

  • And I understand the difference in the way maybe different regulators look at that, but from a nonaccrual perspective, did that impact that number much, or are some of those nonaccruals current?

  • Daryl Moore - Chief Credit Officer

  • Yes, some of their nonaccruals are current, yes. It would be probably - we haven't gone back and matched them up, but I would guess that since we've overlaid our nonaccrual policies onto theirs, I would guess that probably you would be close to having the same ratio of theirs being current as ours being current.

  • Bob Jones - CEO, President

  • Troy, I think the key point Daryl made in his presentation is that half of our nonaccruals are contractually paying or maybe pushing 30 days, but a lot of the St. Joe issues were documentation. Clearly, there's -- we're a little more stringent on documentation. We took the approach of putting in non-accruals so we could keep the focus. There clearly are some credit issues, but we wanted to make sure we got onto the right, whether it's special assets the right attention as we went forward. So we don't see an overall inherent weakness in our portfolio, but clearly they weren't under the same pressure we were from an OCC, or quite frankly, with some of our [exchange] and enhanced credit culture.

  • Troy Ward - Analyst

  • Just a couple more here, Daryl. Of course, the one large $9.2 million, it sounds like one of the OMB customers. Can give us a little color on what that is?

  • Daryl Moore - Chief Credit Officer

  • That's an HVAC contractor. And as I said, it has been on our list for quite a while and it just hit some of our triggers and we downgraded it to the nonaccrual category.

  • Troy Ward - Analyst

  • Then the three loans over $5 million that are nonaccrual, of course that would be one of them. The other two, can you give us some color there, and maybe the largest in the St. Joe as well?

  • Daryl Moore - Chief Credit Officer

  • Yes. The other two our both legacy kind of Old National credits. One would be an assisted living center of roughly $5. -- almost $6 million. The other is a gravel pit operation of roughly $5 million. If you're looking then at St. Joe's, their largest nonaccrual would be here about -- a little over $2 million. So no big credits in nonaccrual that came from St. Joe.

  • Troy Ward - Analyst

  • Ones last one for Bob. Guidance, Bob, clearly the run rate has to pick up substantially just to get to the bottom end of your guidance; I'm looking at about $0.32. From here, I guess how do you get there and are there any onetime gains associated with branch sales aiding that number?

  • Bob Jones - CEO, President

  • No onetime gains, Troy. You get there really through reduced expenses. That's why we want to give you some guidance as to the expense base. You get there through a slightly enhanced margin, and then as I said, slow to modest growth in the balance sheet. We've spent an awful a lot of time on our forecast and we're comfortable the forecast gets us to the numbers that we just gave you.

  • Chris Wolking - SVP, CFO

  • Troy, this is Chris again. I wanted to clarify -- one of your earlier questions was about other expenses. The other expenses was actually related to the property write-downs and some termination of some software. The termination costs associated with the debt reduction would've been a contra upstairs in noninterest income. So the total associated with other expenses related to lease terminations and software was about $2.3 million.

  • Troy Ward - Analyst

  • So on your net interest margin analysis slide, so in that 19 basis points, the other was the other $1 million?

  • Chris Wolking - SVP, CFO

  • No, that would've come in noninterest income, other income, those expenses. So it would have been a contra-type account -- loss on extinguishment of debt.

  • Troy Ward - Analyst

  • Oh, I follow. I've got you. Thank you.

  • Bob Jones - CEO, President

  • This is Bob again, let me just add one other point from a run rate basis is, we took a full $2.5 million of provision in the first quarter. Should our credit quality continue to trend the direction it appears it's trending, we should be able to see some reduction in our provision over the period of time.

  • Troy Ward - Analyst

  • Okay, great.

  • Bob Jones - CEO, President

  • I just want to make sure I'm clear.

  • Operator

  • (OPERATOR INSTRUCTIONS). You have no further questions at this time.

  • Bob Jones - CEO, President

  • Okay, if there's any other questions, as always feel free to call Lynell. Troy, thanks for a great job of asking everybody's question on that call, and again we stand ready to answer any questions you might have. Thank you.

  • Operator

  • This concludes Old National's call. Once again, a replay along with the presentation slides will be available for 12 months on the shareholder relations page of Old National's website at www.OldNational.com. A replay of the call will also be available by dialing 1-800-642-1687, conference ID code 5511786. This replay will be available through May 14. If anyone has any additional questions, please contact Lynell Walton at 812-464-1366. Thank you for your participation in today's conference call.